Business Context and Reporting Period
LTC Properties, Inc. is a self-administered real estate investment trust (REIT) investing primarily in senior housing and long-term care properties, including skilled nursing, assisted living, and independent living facilities. This Form 10-Q covers the quarterly and six-month periods ended June 30, 2010.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2010) | Amount (in thousands) |
|---|---|
| Total Revenues | $36,052 |
| Net Income | $22,200 |
| Net Income Available to Common Stockholders | $14,433 |
| Diluted Earnings Per Share (Common) | $0.61 |
| Net Cash Provided by Operating Activities | $31,656 |
| Net Cash Used in Investing Activities | ($37,953) |
| Net Cash Provided by Financing Activities | $2,939 |
| Cash and Cash Equivalents (End of Period) | $5,498 |
| Total Assets | $517,094 |
| Total Liabilities | $56,204 |
| Bank Borrowings Outstanding | $41,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased to $36.1 million for the six months ended June 30, 2010, from $35.1 million in the prior year period. This was driven by a $1.7 million increase in rental income due to acquisitions, partially offset by a $0.7 million decrease in interest income from mortgage loans.
- Net Income: Net income available to common stockholders decreased slightly to $14.4 million from $14.8 million in the prior year, primarily due to higher income allocated to preferred stockholders.
- Provisions for Doubtful Accounts: Provisions increased significantly to $1.3 million from $0.4 million in the prior year. This was largely due to an $0.85 million provision related to a mortgage loan secured by a private school in Minnesota where the borrower ceased operations and filed for Chapter 7 bankruptcy.
- Investing Activity: Cash used in investing activities surged to $38.0 million from a net cash inflow of $2.5 million in the prior year, reflecting $38.8 million in real estate property acquisitions and capital improvements.
- Debt Structure: Bank borrowings increased to $41.0 million from $13.5 million at year-end 2009. However, subsequent to the period end, the company repaid the entire $41.0 million balance using proceeds from new term notes.
Guidance, Outlook, and Risks
- Capital Markets & Liquidity: The company maintains a $110 million unsecured credit facility (with $69 million available at period end). Subsequent to June 30, 2010, the company issued $50 million in senior unsecured term notes to Prudential Investment Management, Inc., repaid the credit facility, and now has the full $110 million available.
- Dividends: The company declared a monthly cash dividend of $0.13 per common share for July, August, and September 2010.
- Related Party Risk (SHG): A significant risk involves the company's $6.5 million investment in Skilled Healthcare Group (SHG) Senior Subordinated Notes. On July 7, 2010, a jury returned a verdict against SHG awarding plaintiffs over $670 million in damages. While SHG has entered mediation and the company currently views the impairment as temporary, the fair value of the notes has decreased below amortized cost.
- Regulatory Environment: The company notes potential adverse impacts from the Patient Protection and Affordable Care Act and changes in Medicare/Medicaid reimbursement rates, which could affect the financial condition of its lessees and borrowers.
- Asset Sales: A lessee notified the company of its intent to purchase a 195-bed skilled nursing property in Virginia in November 2010. The company anticipates an immaterial net gain.
Investor Verification Checklist
- SHG Litigation Impact: Verify the status of the mediation between SHG and plaintiffs and assess the potential for an other-than-temporary impairment (OTTI) charge on the $6.5 million note investment.
- Minnesota School Loan: Monitor the resolution of the Chapter 7 bankruptcy and the Motion for Relief from Stay regarding the non-performing school mortgage loan.
- Debt Refinancing: Confirm the terms and interest rates of the new $50 million senior unsecured term notes issued to Prudential subsequent to the reporting period.
- Operator Concentration: Review the financial health of major operators (Brookdale, Preferred Care, Extendicare/ALC), which collectively represent a significant portion of assets and revenue.
- Acquisition Integration: Assess the performance of the three properties acquired in the first half of 2010 (Virginia, Florida, Texas) to ensure they meet projected yield targets.